Right now, Detroit is as close as any city in America to becoming a food desert, not just another metropolis like Chicago, Philadelphia, or Cleveland with a bunch of small- and medium-sized food deserts scattered about, but nearly a full-scale, citywide food desert. (A food desert is defined by those who study them as a locality from which healthy food is more than twice as far away as unhealthy food, or where the distance to a bag of potato chips is half the distance to a head of lettuce.) About 80 percent of the residents of Detroit buy their food at the one thousand convenience stores, party stores, liquor stores, and gas stations in the city. There is such a dire shortage of protein in the city that Glemie Dean Beasley, a seventy-year-old retired truck driver, is able to augment his Social Security by selling raccoon carcasses (twelve dollars a piece, serves a family of four) from animals he has treed and shot at undisclosed hunting grounds around the city. Pelts are ten dollars each. Pheasants are also abundant in the city and are occasionally harvested for dinner.

Detroiters who live close enough to suburban borders to find nearby groceries carrying fresh fruit, meat, and vegetables are a small minority of the population. The health consequences of food deserts are obvious and dire. Diabetes, heart failure, hypertension, and obesity are chronic in Detroit, and life expectancy is measurably lower than in any American city.

Not so long ago, there were five produce-carrying grocery chains—Kroger, A&P, Farmer Jack, Wrigley, and Meijer—competing vigorously for the Detroit food market. Today there are none. Nor is there a single WalMart or Costco in the city. Specialty grocer Trader Joe’s just turned down an attractive offer to open an outlet in relatively safe and prosperous midtown Detroit; a rapidly declining population of chronically poor consumers is not what any retailer is after. High employee turnover, loss from theft, and cost of security are also cited by chains as reasons to leave or avoid Detroit. So it is unlikely grocers will ever return, despite the tireless flirtations of City Hall, the Chamber of Commerce, and the Michigan Food and Beverage Association. There is a fabulous once-a-week market, the largest of its kind in the country, on the east side that offers a wide array of fresh meat, eggs, fruit, and vegetables. But most people I saw there on an early April Saturday arrived in well polished SUVs from the suburbs. So despite the Eastern Market, in-city Detroiters are still left with the challenge of finding new ways to feed themselves a healthy meal.

One obvious solution is to grow their own, and the urban backyard garden boom that is sweeping the nation has caught hold in Detroit, particularly in neighborhoods recently settled by immigrants from agrarian cultures of Laos and Bangladesh, who are almost certain to become major players in an agrarian Detroit. Add to that the five hundred or so twenty-by-twenty-foot community plots and a handful of three- to ten-acre farms cultured by church and non-profit groups, and during its four-month growing season, Detroit is producing somewhere between 10 and 15 percent of its food supply inside city limits—more than most American cities, but nowhere near enough to allay the food desert problem. About 3 percent of the groceries sold at the Eastern Market are homegrown; the rest are brought into Detroit by a handful of peri-urban farmers and about one hundred and fifty freelance food dealers who buy their produce from Michigan farms between thirty and one hundred miles from the city and truck it into the market.

There are more visionaries in Detroit than in most Rust-Belt cities, and thus more visions of a community rising from the ashes of a moribund industry to become, if not an urban paradise, something close to it. The most intriguing visionaries in Detroit, at least the ones who drew me to the city, were those who imagine growing food among the ruins—chard and tomatoes on vacant lots (there are over 103,000 in the city, sixty thousand owned by the city), orchards on former school grounds, mushrooms in open basements, fish in abandoned factories, hydroponics in bankrupt department stores, livestock grazing on former golf courses, high-rise farms in old hotels, vermiculture, permaculture, hydroponics, aquaponics, waving wheat where cars were once test-driven, and winter greens sprouting inside the frames of single-story bungalows stripped of their skin and re-sided with Plexiglas—a homemade greenhouse. Those are just a few of the agricultural technologies envisioned for the urban prairie Detroit has become.

There are also proposals on the mayor’s desk to rezone vast sections A-something (“A” for agriculture), and a proposed master plan that would move the few people residing in lonely, besotted neighborhoods into Detroit’s nine loosely defined villages and turn the rest of the city into open farmland. An American Institute of Architects panel concludes that all Detroit’s residents could fit comfortably in fifty square miles of land. Much of the remaining ninety square miles could be farmed. Were that to happen, and a substantial investment was made in greenhouses, vertical farms, and aquaponic systems, Detroit could be producing protein and fibre 365 days a year and soon become the first and only city in the world to produce close to 100 percent of its food supply within its city limits. No semis hauling groceries, no out-of-town truck farmers, no food dealers. And no chain stores need move back. Everything eaten in the city could be grown in the city and distributed to locally owned and operated stores and co-ops. I met no one in Detroit who believed that was impossible, but only a few who believed it would happen. It could, but not without a lot of political and community will.

There are a few cities in the world that grow and provide about half their total food supply within their urban and peri-urban regions—Dar es Salaam, Tanzania; Havana, Cuba; Hanoi, Vietnam; Dakar, Senegal; Rosario, Argentina; Cagayan de Oro in the Philippines; and, my personal favorite, Cuenca, Equador—all of which have much longer growing seasons than Detroit. However, those cities evolved that way, almost unintentionally. They are, in fact, about where Detroit was agriculturally around one hundred and fifty years ago. Half of them will almost surely drop under 50 percent sufficiency within the next two decades as industry subsumes cultivated land to build factories (à la China). Because of its unique situation, Detroit could come close to being 100 percent self-sufficient.

First, the city lies on one hundred and forty square miles of former farmland. Manhattan, Boston, and San Francisco could be placed inside the borders of Detroit with room to spare, and the population is about the same as the smallest of those cities, San Francisco: eight hundred thousand. And that number is still declining from a high of two million in the mid-nineteen fifties. Demographers expect Detroit’s population to level off somewhere between five hundred thousand and six hundred thousand by 2025. Right now there is about forty square miles of unoccupied open land in the city, the area of San Francisco, and that landmass could be doubled by moving a few thousand people out of hazardous firetraps into affordable housing in the eight villages. As I drove around the city, I saw many full-sized blocks with one, two, or three houses on them, many already burned out and abandoned. The ones that weren’t would make splendid farmhouses.

As Detroit was built on rich agricultural land, the soil beneath the city is fertile and arable. Certainly some of it is contaminated with the wastes of heavy industry, but not so badly that it’s beyond remediation. In fact, phyto-remediation, using certain plants to remove toxic chemicals permanently from the soil, is already practiced in parts of the city. And some of the plants used for remediation can be readily converted to biofuels. Others can be safely fed to livestock.

Leading the way in Detroit’s soil remediation is Malik Yakini, owner of the Black Star Community Book Store and founder of the Detroit Black Community Food Security Network. Yakini and his colleagues begin the remediation process by removing abandoned house foundations and toxic debris from vacated industrial sites. Often that is all that need be done to begin farming. Throw a little compost on the ground, turn it in, sow some seeds, and water it. Water in Detroit is remarkably clean and plentiful.

Although Detroiters have been growing produce in the city since its days as an eighteenth-century French trading outpost, urban farming was given a major boost in the nineteen eighties by a network of African-American elders calling themselves the “Gardening Angels.” As migrants from the rural South, where many had worked as small farmers and field hands, they brought agrarian skills to vacant lots and abandoned industrial sites of the city, and set out to reconnect their descendants, children of asphalt, to the Earth, and teach them that useful work doesn’t necessarily mean getting a job in a factory.

Thirty years later, Detroit has an eclectic mix of agricultural systems, ranging from three-foot window boxes growing a few heads of lettuce to a large-scale farm run by The Catherine Ferguson Academy, a home and school for pregnant girls that not only produces a wide variety of fruits and vegetables, but also raises chickens, geese, ducks, bees, rabbits, and milk goats.

Across town, Capuchin Brother Rick Samyn manages a garden that not only provides fresh fruits and vegetables to city soup kitchens, but also education to neighborhood children. There are about eighty smaller community gardens scattered about the city, more and more of them raising farm animals alongside the veggies. At the moment, domestic livestock is forbidden in the city, as are beehives. But the ordinance against them is generally ignored and the mayor’s office assures me that repeal of the bans are imminent.

About five hundred small plots have been created by an international organization called Urban Farming, founded by acclaimed songwriter Taja Sevelle. Realizing that Detroit was the most agriculturally promising of the fourteen cities in five countries where Urban Farming now exists, Sevelle moved herself and her organization’s headquarters there last year. Her goal is to triple the amount of land under cultivation in Detroit every year. All food grown by Urban Farming is given free to the poor. According to Urban Farming’s Detroit manager, Michael Travis, that won’t change.

Larger scale, for-profit farming is also on the drawing board. Financial services entrepreneur John Hantz has asked the city to let him farm a seventy-acre parcel he owns close to the Eastern Market. If that is approved and succeeds in producing food for the market, and profit for Hantz Farms, Hantz hopes to create more large-scale commercial farms around the city. Not everyone in Detroit’s agricultural community is happy with the scale or intentions of Hantz’s vision, but it seems certain to become part of the mix. And unemployed people will be put to work.

Any agro-economist will tell you that urban farming creates jobs. Even without local production, the food industry creates three dollars of job growth for every dollar spent on food—a larger multiplier effect than almost any other product or industry. Farm a city, and that figure jumps over five dollars. To a community with persistent two-digit unemployment, that number is manna. But that’s only one economic advantage of farming a city.

The average food product purchased in a U.S. chain store has traveled thirteen hundred miles, and about half of it has spoiled en route, despite the fact that it was bioengineered to withstand transport. The total mileage in a three-course American meal approaches twenty-five thousand. The food seems fresh because it has been refrigerated in transit, adding great expense and a huge carbon footprint to each item, and subtracting most of the minerals and vitamins that would still be there were the food grown close by.

I drove around the city one day with Dwight Vaughter and Gary Wozniak. A soft-spoken African American, Vaughter is CEO of SHAR, a self-help drug rehab program with about two hundred residents recovering from various addictions in an abandoned hospital. Wozniak, a bright, gregarious Polish American, who, unlike most of his fellow Poles, has stayed in Detroit, is the program’s financial director. Vaughter and Wozniak are trying to create a labor-intensive economic base for their program, with the conviction that farming and gardening are therapeutic. They have their eyes on two thousand acres in one of the worst sections of the city, not far from the Eastern Market. They estimate that there are about four thousand people still living in the area, most of them in houses that should have been condemned and razed years ago. There are also six churches in the section, offering some of the best ecclesiastical architecture in the city.

I tried to imagine what this weedy, decrepit, trash-ridden urban dead zone would look like under cultivation. First, I removed the overhead utilities and opened the sky a little. Then I tore up the useless grid of potholed streets and sidewalks and replaced them with a long winding road that would take vegetables to market and bring parishioners to church. I wrecked and removed most of the houses I saw, leaving a few that somehow held some charm and utility. Of course, I left the churches standing, as I did a solid red brick school, boarded up a decade ago when the student body dropped to a dozen or so bored and unstimulated deadbeats. It could be reopened as an urban ag-school, or SHAR’s residents could live there. I plowed and planted rows of every imaginable vegetable, created orchards and raised beds, set up beehives and built chicken coops, rabbit warrens, barns, and corrals for sheep, goats, and horses. And of course, I built sturdy hoop houses, rows of them, heated by burning methane from composting manure and ag-waste to keep frost from winter crops. The harvest was tended by former drug addicts who like so many before them found salvation in growing things that keep their brethren alive.

That afternoon I visited Grace Lee Boggs, a ninety-three-year-old Chinese-American widow who has been envisioning farms in Detroit for decades. Widow of legendary civil rights activist Jimmy Boggs, Grace preserves his legacy with the energy of ten activists. The main question on my mind as I climbed the steps to her modest east side home, now a center for community organizers, was whether or not Detroit possesses the community and political will to scale its agriculture up to 100 percent food self-sufficiency. Yes, Grace said to the former, and no to the latter. But she really didn’t believe that political will was that essential.

“The food riots erupting around the world challenge us to rethink our whole approach to food,” she said, but as communities, not as bodies politic. “Today’s hunger crisis is rooted in the industrialized food system which destroys local food production and forces nations like Kenya, which only twenty-five years ago was food self-sufficient, to import 80 percent of its food because its productive land is being used by global corporations to grow flowers and luxury foods for export.” The same thing happened to Detroit, she says, which was once before a food self-sufficient community.

I asked her whether the city government would support large-scale urban agriculture. “City government is irrelevant,” she answered. “Positive change, leaps forward in the evolution of humankind do not start with governments. They start right here in our living rooms and kitchens. We are the leaders we are looking for.”

All the decaying Rust-Belt cities in the American heartland have at one time or another imagined themselves transformed into some sort of exciting new post-industrial urban model. And some have begun the process of transformation. Now it’s Detroit’s turn, Boggs believes. It could follow the examples of Pittsburgh, Cleveland, and Buffalo, and become a slightly recovered metropolis, another pathetic industrial has-been still addicted to federal stimulus, marginal jobs, and the corporate food system. Or it could make a complete break and become, if not a paradise, well, at least a pretty good place to live.

Not everyone in Detroit is enthusiastic about farming. Many urbanites believe that structures of some sort or another belong on urban land. And a lot of those people just elected David Bing mayor of the city. Bing’s opponent, acting mayor Ken Cockrel, was committed to expanding urban agriculture in Detroit. Bing has not said he’s opposed to it, but his background as a successful automotive parts manufacturer will likely have him favoring a future that maintains the city’s primary nickname: Motor City.

And there remains a lasting sense of urbanity in Detroit. “This is a city, not a farm,” remarked one skeptic of urban farming. She’s right, of course. A city is more than a farm. But that’s what makes Detroit’s rural future exciting. Where else in the world can one find a one-hundred-and-forty-square-mile agricultural community with four major league sports teams, two good universities, the fifth largest art museum in the country, a world-class hospital, and headquarters of a now-global industry, that while faltering, stands ready to green their products and keep three million people in the rest of the country employed?

Despite big auto’s crash, “Detroit” is still synonymous with the industry. When people ask, “What will become of Detroit?” most of them still mean, “What will become of GM, Ford, and Chrysler?” If Detroit the city is to survive in any form, it should probably get past that question and begin searching for ways to put its most promising assets, land and people, to productive use again by becoming America’s first modern agrarian metropolis.

Contemporary Detroit gave new meaning to the word “wasteland.” It still stands as a monument to a form of land abuse that became endemic to industrial America—once-productive farmland, teaming with wildlife, was paved and poisoned for corporate imperatives. Now the city offers itself as an opportunity to restore some of its agrarian tradition, not fifty miles from downtown in the countryside where most of us believe that tradition was originally established, but a short bicycle ride away. American cities once grew much of their food within walking distance of most of their residents. In fact, in the eighteenth and early nineteenth centuries, most early American cities, Detroit included, looked more like the English countryside, with a cluster of small villages interspersed with green open space. Eventually, farmers of the open space sold their land to developers and either retired or moved their farms out of cities, which were cut into grids and plastered with factories, shopping malls, and identical row houses.

Detroit now offers America a perfect place to redefine urban economics, moving away from the totally paved, heavy-industrial factory-town model to a resilient, holistic, economically diverse, self-sufficient, intensely green, rural/urban community—and in doing so become the first modern American city where agriculture, while perhaps not the largest, is the most vital industry.

Sincerely,
Mark Dowie

November 3, 2009

Editor’s Note: This article originally appeared in the August 2009 edition of Guernica. To view the original article, “Food Among the Ruins,” please click here.

Urban Farming in Detroit and Big Cities Back to Small Towns and Agriculture was originally featured on Whiskey and Gunpowder

So, this reasoning goes, the greater risk is that asset prices continue to fall. This is the classic debt-deflation point of view. The theory seems to fit the facts of what we are seeing in the marketplace right now.

I don’t dismiss these arguments easily — and there is more to it than what I’ve given you here. I’ve spent some time going over the arguments of some of deflation’s most persuasive and sophisticated advocates: money manager Van Hoisington, economist David Rosenberg and others.

Still, I think the endgame is for inflation — which is when paper currencies buy less. Given the choice of holding U.S. dollars or real assets (such as gold or iron ore or land), I’ll take real assets.

Over the weekend, Thomas Donlan at Barron’s had a good analogy for it all. He asked what you would rather own as store of value, bananas or corn? The obvious answer is corn, because you can store it for months. Corn lasts longer than bananas. Fruit rots. You can also use corn for a lot of different things — corn flour, animal feed, etc. You can also arrange to sell corn into the future, say, by arranging to deliver corn so many days from today.

Corn can lose value, obviously, as can any real asset. But it is a better choice than holding the bananas.

Donlan likens money to bananas and natural resources to corn. “In the modern economy,” he writes, “a barrel of oil is much like a bag of corn… Paper money and bank balances are more like the bag of bananas.” When currency rots, we call that inflation.

The problem with the deflation arguments long term, it seems to me, is that you are betting against a government’s ability to destroy its own currency. Governments are seldom good at anything, but one thing they are undeniably good at is destroying their own currencies. The dollar has lost 95% or so of its value since 1913. That’s a pretty darn good job. Other countries have been even more thorough.

So that would be the way to bet. Deflation may prevail today, but the real question is for how long. My own crystal ball is frustratingly cloudy on the issue. But the great rewards in investing are always with the out-of-consensus view.

The upside from holding Treasuries seems hardly worth the risk of being wrong, for instance. On the other hand, if we are right about currency rot, then we’ll make multiples of our money on natural resource stocks.

The downside on many commodities seems low, because the prices have already corrected. In several instances, as with oil and natural gas and iron ore, we are already below the marginal cost of production for much of the industry. So unless we don’t need these things at all anymore, the simple economics of the businesses involved help support a certain price structure.

Worse Than Subprime

And anyway, as far as the case for gold is concerned, I’ve been arguing that it is less about inflation or deflation than it is about creditworthiness in general. I wrote about this in your May issue (No. 35), The Great Deleveraging.

Gold does well during times of credit troubles. It did well in the 1930s, for instance, even though that was largely a deflationary era. Banking troubles made investors turn to gold.

On that front, we’ve got plenty of banking troubles on the way. Today’s Wall Street Journal headline, buried in the middle of the paper, hints at what’s to come: “Pick-a-Pay Loans: Worse Than Subprime.” The piece begins:

“For the third straight month, option adjustable-rate mortgages are generating proportionately more delinquencies and foreclosures than subprime mortgages, the scourge of the U.S.”

These loans include only partial-interest payments. So the loan balances on many of these loans have actually gone up while housing prices tumbled. It’s a disaster. As of April 36% of these loans were at least 60 days past due.

These pathetic loans will mean more large losses for banks — in particular Wells Fargo, J.P. Morgan Chase and others who were active in these markets. Wells Fargo, the WSJ points out, has a mountain of this stuff — $115 billion of crap.

So as long as we have banking troubles, we have the potential for fear to return in a big way. And that is when gold does well.

In other cultures, too, gold is more naturally a part of the wealth-storing equation than it is in most Western countries. In places such as China, India and the Arab world, people see gold more readily as a store of wealth than the typical American or European. These areas of the world are on the rise, and their gold holdings are also rising.

Beyond this, gold stocks are cheap again. Gold also has a seasonal tendency to be weak in the summer months. So against all this, I’d use the market weakness in the gold price and in gold shares to pick up your favorite gold miners.

Have a good week, and I’ll write you again soon.

Regards,
Chris Mayer

July 22, 2009

Gold Stocks Take a Hit Plus Worse Than Subprime was originally featured on Whiskey and Gunpowder

It was a truly bullish way to wrap up the week. China reported a 7.9% rise second in quarter GDP, driven mostly by a 15% surge in June consumption and a huge boom in bank lending and government stimulus. Aussie stocks felt the warm glow and rallied just below 4,000 on the ASX/200 Friday. Aussie stocks were up nearly 7% for the week.

But the even better news from the bullish camp is that perma-bear Nouriel Roubini has defected! Yes, Roubini told a conference that the “free fall” in financial losses is over and the U.S. may exit its recession by the end of the year. This was enough sweet talk to send the Dow up nearly one percent.

And then there was an upgrade to second half U.S. GDP forecasts from the U.S. Federal Reserve. In April, the Fed said second half U.S. GDP would shrink by 1.3% to 2.0%. The revised forecast released yesterday now says U.S. GDP will only shrink by 1.0% to 1.5%. A stunning upgrade!

The Fed’s revised projections also show that the U.S. economy will grow faster than it first thought in 2010, once the much-anticipated recovery takes hold. In April the Fed thought the U.S. would grow by 2.0% to 3%. But in the revised forecast now says the growth rate should soar from 2.1% to 3.3%. A stunning upgrade!

The only negative note in the Fed’s forecast is that it reckons U.S. unemployment will keep growing to over 10%. That, presumably, is a drag on the economy. But if credit conditions improve, maybe all the people who’ve lost jobs because the U.S. economy is not producing and not competitive can, you know, get a credit card and live off of that.

But putting on our serious face, and while we are giving valuable publishing space to the optimists, we should point out that some people think the worst case scenario for the U.S. Housing market is already priced in to financial stocks. This leaves said stocks all clear to lead the market higher, along with tech, resources, bonds, and cash!

For example, Jim Cramer reckons that if you assume a 50% total write-off rate on the 14 million mortgages written between 2005 and 2007 in the U.S., you are only talking US$1.4 trillion in losses (7 million homes X $200,000 per home. ) Cramer says the banks have already written off that amount and that the banks stocks are priced for a worst-case scenario that may not materialize.

And if it doesn’t, it would lead to a faster recovery in bank balance sheets, which in turn would lead to a recovery in bank lending, which would not lead to inflation because the Fed has a plan to remove liquidity from the system and everything thing will be fine!

And you thought Neverland was a ranch in California.

Whether Cramer is right depends on which vintage of mortgages have accounted for the losses in the financial sector so far and which are still going bad. The chart below from the Cleveland branch of the Federal Reserve suggests to us that there are more losses to come than have been accounted for. Why do we say that? First the chart…

What does the chart tell us? Well, it shows that in 2003 and 2004, Fannie Mae and Freddie Mac led the surge into subprime lending. This is the vintage of loans that went bad in the last year as interest rates moved up and house prices moved down, putting many new buyers and speculators underwater. This is where the first $1.4 trillion in losses came from.

But the real issue is the quality and quantity of mortgages that were packaged up and securitized from 2005 to 2007. As the GSE’s reduced their originations, banks stepped in—often having acquired non-traditional lenders for just this purpose—to keep feeding the boom. The banks wrote the loans and sold them to each other, purchasing default insurance on the securitized loans from AIG.

These loans are not subprime but supposedly higher credit quality Option ARM and Alt-A loans. And these are the loans the banks, we’d suggest, are carrying at elevated values. We’d also suggest the banks are not adequately capitalized to realize losses on these loans should the housing market get swamped again by another wave of defaults and foreclosures. This is where the second $1.4 trillion in losses will come from.

But of course it’s wacky to suggest all that. We might as well say that aliens crashed at Roswell and that the moon landing was faked (it probably was). There’s just no way it could get any worse than it did in 2007. Could it?

Regards,
Dan Denning

July 21, 2009

Mortgage Defaults May Trump the Fed was originally featured on Whiskey and Gunpowder

Even the UK’s small, tightly packed mainland, floating off the edge of Europe, includes disparate and distinct real-estate markets. Glasgow is as different from London as Cornwall from Cheshire. But in the main (and the mania), and with a peak of 185,000 new dwellings under construction in 2006, the broad sweep of house-price inflation…followed by an inevitable slump lasting six years or so…tends to apply across the nation.

In the United States, in contrast, new housing starts at the peak of what pundits, economists and investment bankers clearly felt was a coast-to-coast boom in 2006 approached 1.63 million amid a total housing market of 128 million units spread across 3.5 million square miles.

By necessity, that makes the idea of an “average” home price more slippery. But let’s not let such quibbles clog up our spreadsheet! Not after math PhDs, applied to mortgage-backed zeroes, clicked and dragged the answer “AAA” whenever asked. And not before we contend with the data itself.

This first chart’s solid enough, thanks to the certainty with which the Census Bureau dispenses its data.

It shows the median price of new US housing, at sale, divided by the ounce-price of gold, monthly average. And as you can see, new housing has swung wildly – measured in ounces – over the last 45 years. Quite clearly, one made a better home for investment than the other over distinct periods, as the mid-way price of new homes (half the market paid less, the other half more) was rocked and rolled by booms, bubbles and busts in both bricks and bars.

Second up, existing homes bought on the secondary market – and the same picture, but only on an annualized basis (and with the National Association of Realtors thrown in as a source) for the Census Bureau’s less lengthy, less detailed data.

You can see, between the two charts, how new housing during this last real-estate boom (2000-2006 in nominal prices) began and topped out much sooner when priced in terms of gold. New units also reached further above existing-home prices too, peaking at $243,000 in 2006 – then 550 ounces of metal – or some 10% higher than the secondary market.

Perhaps that extra cash paid for new homes’ expanding foot-print. But it’s also worth noting, turning aside from Gold Investment for a moment, that new US home prices this decade also saw the mean outstripping the median as never before. The gap between average and mid-point prices, in fact, gaped from one-fifth or less (1975-1999) to as wide as 30% during the summer of 2006. Which might show, we guess, a growing number of super-priced units way up at the top-end of the market…bought and paid for, perhaps, with bonuses skimmed off mortgage-backed bonds sold against the sub-median half.

Finally, the money shot…

True long-run figures for housing, like the concept of “average” itself, are more sketchy than Mel Gibson after a night on the sauce.

We’ve used Robert Shiller’s invaluable numbers, of course, but they only come as an index, itself built from five sources stretching back to 1890. Rolling those numbers back from today’s current average ($175,000 according to the NAR) only throws up big gaps with the Census Bureau prices collated and published every 10 years starting with 1940. It also puts the price of US housing above $4,000 in 1900 – and in 1900 dollars, too – when average wages were just $2 per day.

Okay, so home-buying was yet to meet democracy through that great 20th century liberator, the securitized mortgage loan. And yes, two-thirds of US homes had yet to gain running water, let alone electricity. But as in the UK data, Gold Bullion regained its Great Depression value in housing as the Great Inflation of the 1970s peaked out, suggesting (to us, at least) that its utility as a store of value was little diminished by new bath fittings and copper wiring.

The broad sweep – smoothed out to fix those anomalies which our quick desk-bound research, a mere 5,000 miles from the Library of Congress throws up – remains as broad and as sweeping as either gold bulls or bears might hope to spy.

From here, the bottom in housing may still be to come, at least priced in gold. Broad-sweeping investors are invited to draw their own conclusions.

Regards,
Adrian Ash
BullionVault

May 6, 2009

U.S. House Prices in Gold was originally featured on Whiskey and Gunpowder

Letís do some housing math.  Last fall there were about one million delinquent mortgages.  Let us presume the current figure is now fifty percent worse ñ i.e. one point five million homes.

Assume that the average delinquent loan has a face value of about $180,000, and that a typical mortgage would have a term of from 15 to 30 years to maturity.  Under normal circumstances the borrower would be required to pay about $10,800 per year in interest and principal to amortize the loan.  Because of the variable rate mortgages this cost would be about $20000 per year per loan.

We are told that the housing crises is the cause of the current financial problems of the banking industry and  that fixing the housing crises is a critical first step in restoring financial stability to the economy. On a worst case basis presume that all delinquent mortgages are in default, which is not true because some of the borrowers could make partial payments or could pay if the terms of the mortgages were renegotiated.

The annual cost of the delinquent payments would be $30 billion.  Are we to believe that for a cost of less than $2.5 billion per month all of the defaults of all of the banks on all of the sub prime mortgages could be resolved?

Why then are we talking about payments to banks and financial institutions of more than a trillion dollars? Is there no one in Washington that does the math? Wait, you say, the problem is more difficult. You are right, other complications must be considered.

If the Federal government, on a temporary basis, guaranteed the monthly payments of the mortgages that are delinquent, the banks would have no reason to presume, as they do, that the outstanding balance of the loan is in default.  When banks make this presumption they deduct the total value of the loan from their reserves.  They declare this amount to be a loss which impacts their capital account. The formal declaration of loan default triggers a secondary default of derivative securities for which the sub prime mortgages are collateral. This in turn activates the credit default swaps obligations.

Housing market foreclosure proceedings and the subsequent sale of assets by public auction creates an environment of pure opportunism in which there is no floor price.  The structure of the market encourages instability and low pricing.  This procedure obviously has a negative affect on the whole real estate market.

With respect to renegotiation of troubled mortgages the method of evaluation of property is important.  In a stable, unemotional market the value of a home would be the replacement cost plus the value of the land.  Both factors can be reasonably determined by skilled evaluation. In some instances the land could, in fact, have only nominal value.  In any normal market the value thus determined should represent the minimum basic price at which a house would be sold and also the value for mortgage purposes.

Let us take a typical sub prime home with a 10 year variable rate loan, now at 11%, in the amount of $200,000 which is now under water by $50,000.  The ownerís monthly cost is $2507 per month.   If the calculated assessed value determined by the procedure proposed above is $170,000, a new 30 year fixed rate mortgage at 6% would cost $1049 per month.  The bank would now have a non toxic asset on its books equal to 85% of the original loan value. It is only the remaining 15% that is toxic.

What would be the cost of settling all 1500000 delinquent mortgages, using the same assumptions?   The total amount owing would be $255 billion which would convert into $217 billion of credit worthy loans and toxic assets of $38.25 billion.  Even in a worst case analysis this is the cost of stopping the housing slump, refinancing the banking system and restoring the credit markets to normality.  In total it represents only a few days of normal Federal Government spending.

A matter of great complexity would be the renegotiation of the terms of outstanding credit obligations so that the principal would be secure but the rates of return would be reduced. It took Canada many months to negotiate an arrangement to prevent the default of collateralized debt obligations.

So, maybe my calculations are a bit off.  Suppose the number of homes to be refinanced is double the amount calculated.  Suppose other uncertainties of equal magnitude exist. Nothing adds up to the trillions of dollars spent and proposed to be spent. The magnitude of these expenditures must inevitably lead to the deterioration of the US dollar as a currency.  And, if a significant portion of leveraged debt can be saved, AIG might not need more bail out money.

At this time, with unemployment of 8%, most wage earners are better off than they were a year ago  Oil and gas prices are down, clothing prices are at sale levels.  Cars are being sold at much reduced prices (5 years at 0% interest), housing prices will never again be as low as they are. It would cost only $100 billion per year to double unemployment benefits for the unemployed. Investors, and particularly retirees, have suffered greatly.  With stock prices at enticing fifteen year lows there is hope of some recovery but perhaps something should be done for them as well.

Would someone please kindly explain to me how my calculations can be so wrong! CNN has suggested that the cost of the recovery program proposed to date will be in excess of $2,4 trillion. Is there no one in Washington that can do simple math or is there some rule that rounds off any calculation to the nearest eleven zero figure.

John E. Conner

John Conner is a former Royal Canadian Air Force pilot, an economist and he’s founded and headed a company or two. He’s now retired and free to pour a shot at the Whiskey Bar now and then.

Math of Subprime Mortgage Default was originally featured on Whiskey and Gunpowder

Who knows why stocks really rally? But it probably wasn’t the housing news. Prices continue to decline in the U.S. market. Inventories are high. And there is still the matter of millions of Option ARM loans that are still nestled deep in the bowels of the global financial system. We’ll get to them in a moment. Oh yes we will, precious.

First, a bit of polly [politician—Ed.] bashing. –”Every single job loss in Australia is a human tragedy,” Wayne Swan has said. “It impacts on families and local communities, as well as the economy.”

Has the Treasurer never been fired? Job losses are indeed a cause for personal distress. We’ve been through a few. You have to regroup, gather your wits, tighten your belt, round up other useful clichés, and do what you can to survive?

But a human tragedy? That is utter nonsense. There are plenty of human tragedies that happen every day. Children die of cancer. Orphans are hit by trucks. Supermodels go hungry.

Job losses are a normal part of the economy. Hopefully you have an economy where new jobs replace the ones lost. This happens if you have a tax and regulatory system that rewards initiative, hard-work, and risk taking. The trouble with the emotional response to job losses, as much as it displays your sympathy and compassion, is that it encourages you to try and build a system where no one ever loses their job.

If you do this, you end up with a system that creates fewer jobs and less wealth. We won’t go into it in more depth. But if you’re keen on the subject, we recommend this essay by Charles Murray.

What about the Aussie housing market, you say? Glad you asked…

“The Australian housing market is facing the prospect of a ‘perfect storm’ of financial pressures, including high mortgage debt, overvalued homes and rising unemployment, which could see prices eventually fall by as much as 30 per cent, investors have been warned,” reads a story in today’s Age. Read it and weep.

It’s true the market has shown surprising resilience. The Canadian research group that the Age report cites says it can’t last.”The housing market is looking particularly vulnerable, with over-inflated prices, deteriorating affordability and slowing household income growth…There is an increasing possibility of a major housing bust in Australia.”

It does feel a bit like the eye of a hurricane, although we’ve never been in one. The sky is blue. The sun is out. The wind is down. Let’s have a picnic. We’ll bring the cricket bat and stumps, you bring the food and beer.

On a more serious note, as we’ve written in the introductory article to the March Diggers and Drillers, the only good news in all of this is that you have a pretty good idea of where all of this is headed (huge inflation) and one way to prepare for it (metals and energy shares).

If more bank losses are ahead (see below) then monetary expansion is on the cards to try and counter it. Deleveraging leads to lower asset prices. The Fed wants to fight it. We’re not saying it will be successful. But there’s no doubt Big Ben will try.

“Bernanke May Need `Massive’ Asset Purchases to Counter Deeper Contraction,” reports Bloomberg. “The Federal Open Market Committee, gathering today and tomorrow in Washington, needs to redouble its efforts after the central bank’s balance sheet shrank 17 percent from a $2.3 trillion December peak.”

Here’s a thought though. The Fed may choose to expand its balance sheet by buying Treasuries. But it may not prop up markets at all. As Peter Schiff noted in a pod-cast last week, the Fed may end up being the only large buyer of Treasuries while everyone else sells. U.S. interest rates will rise and the U.S. dollar will…not rise.

Peter suggests a much more rapid dollar crisis than seems possible at the moment, given the casual way through which officials are waltzing through the crisis. But this G20 meeting in London next month should be interesting. We expect there to be social unrest and violence. We also expect that the world’s investors may realise the markets overseers have no freakin’ clue what they’re doing. After that?

Well, your guess is as good as ours. But we’re looking to gold and oil. More on that next week.

Now about those mortgages…You remember the good old Option ARM don’t you? That’s the loan that allows you to choose the size of the payment you make on your monthly mortgage. Typically the loan begins with a twelve month introductory rate. After that, you can choose the minimum payment option.

If you choose the minimum payment option, you actually pay less each month that the interest on your loan. That interest is deferred, but it’s added to your principal. That means your principal is growing all the time. This is why these loans were also referred to as negative amortisation (or neg am) loans. You weren’t paying it off. You were actually growing it.

We hope you’ll bear with us for a moment as we go through this. The reason? There’s a slight sense of relief in markets right now. Everyone is throwing stones at AIG. And with the market putting a few good up days, people are losing the sense that our financial system faces serious problems. But they are trillions of dollars serious. And no amount of pleading by the U.S. Treasury Secretary for bankers to lend will change that. More losses are head.

But what size will the losses be? Another trillion? Another two trillion? Well let’s exclude commercial property and loans securitised with credit card receivables or auto loans. Let’s just look at Option ARMs.

Remember, an Option ARM loan “recasts” after five years to a new principal. The interest rate might even stay the same. But if the loan has been negatively amortising (growing as deferred interest payment are added to the principal), then the size of the loan is going to be much larger (an average of 30%, by some estimates).

Even if you’re paying the same interest rate, households at the margin are going to have a much harder time making minimum payments on loans that are 30% larger. And we’re not talking a small amount here. The Washington Post reports that between 2004 and 2007, over US$750 billion in Option ARM loans were originated. The scary part is that, as of late December last year, 28% of those loans were either delinquent or already in foreclosure.

And that’s before the “recasts” have even hit the borrowers. Most “recasts” don’t happen until five years down the track. That means mortgage holders wouldn’t confront the prospect of a higher monthly payment until 2011 or 2012. The chart below from Credit Suisse shows the pig in the python problem.

Bernanke has solved the interest rate problem for home buyers with adjustable rate mortgages by slashing short-term rates to zero, effectively. What’s more, he’s conducted purchases of mortgage backed securities by Fannie Mae and Freddie Mac in an attempt to bring down mortgage rates directly.

The looming trouble, however, is that negative amortisation ads to principal. It does so at a time when home prices continue to fall and unemployment is rising. Making a much higher payment is pretty shocking to begin with. It’s near impossible when you’re out of a job.

The trouble will hit sooner than the Credit Suisse chart suggests. Option ARMs automatically recast at the higher principal level once a predetermined loan to value ratio (LTV) is reached. For example, say you take out an Option ARM at an 80% (LTV) and immediately begin making the minimum payment. Your loan automatically recasts at an 85% LTV ratio. In other words, your loan recasts sooner than the five years you expected because of negative amortisation.

This is why the Credit Suisse chart shows a swelling amount of recasts beginning in April of 2009 and peaking in December of this year. It turns out many of those who took out Option ARMs chose the minimum payment. This led to much faster growth in the loan principal, thanks to neg am. And now, it’s going to lead to a much sooner recast of the loan.

As you may know, the current mortgage relief plans in the States, as feeble as they are, do not allow you to refinance your home if you already have negative equity. This means that in the coming months-starting next month-you have millions of home owners who will face much higher monthly payments on their mortgage.

Do you think they’ll pay them? Can they afford to? What will happen to house prices as this wave of neg am Option ARMs goes into default and foreclosure? There could be some real bargains in the housing market.

But for the banks, there will be some real pain. The banks, the insurance companies, the usual suspects, these are the institutions that stand the most to lose from losses on that $750 billion wave of Option ARM recasts. We’re not saying all those loans will go into default. But at the very least, the losses are certain to be taken, even though no one knows how big they will be.

Now maybe all this is “priced in” to bank shares and financial stocks. It’s pretty hard to price in what you don’t know, though. What seems certain is that banks would want to hoard capital in the coming months, not lend it. They face hundreds of billions more in losses, and that’s just from residential real estate (not commercial real estate or corporate bonds).

How will credit recover under those conditions? We reckon it won’t. In fact, the second contraction of the credit crisis could be worse than the first. You should consider that as you ponder your decision to get in our out of the stock market. Think of the number of companies that are already locked out of access to capital and credit. Will that improve in the coming months?

There’s a very real chance it could get much worse. Of course we hope that’s not true. But if it is, it means all those clowns holding press conferences about bailouts and recoveries are just whistling past the grave yard.

If they were smart, they’d be storing up cash and keeping their monkey yaps shut, or better yet, setting up a warehouse to settle all the CDS AIG has underwritten so it doesn’t continue to be a giant conduit between the American tax payer and AIGs counterparties (investment banks and commercial banks that bought CDS from AIG).

Regards,
Dan Denning
www.dailyreckoning.com.au

March 19, 2009

Housing Markets Face Perfect Storm of Job Loss and Neg Am was originally featured on Whiskey and Gunpowder

The Perverse Incentive

That’s a great name for a truth that somehow never quite surfaces: the role of HUD Housing Goals.  You see, my old pal Barney loves to blame “Wall Street greed” for, well, everything.  And Wall Street was greedy, no doubt.  But without the incentive — the search to do the impossible (namely securitizing loans that had unsound foundations) — caused by a very simple order: from the Department of Housing and Urban Development (yet more of my favorite people).

They gave that order to us at Fannie and Freddie.  A simple set of numbers; a set of arbitrary figures that told us how many loans we had to make that year to minorities and to the poor.  Not the deserving, not the responsible — but just to someone based on their skin color and their income.  No one considered the human cost to them and to their families for being misled by products no one in their right mind would use outside of seasoned real estate professionals with nerves of steel.  Perhaps the most offensive thing about this was not the rubble that it made of Wall Street firms and high-flying careers, but that it victimized those who it claimed it would help.  That is what is truly monstrous — and something few are willing to speak of.

These “HUD Housing Goals” created an artificial incentive.  Fannie and Freddie would buy those loans, sometimes at a significant loss even before the house price correction (I won’t say downturn… that would imply they were reasonably priced to begin with).  And that artificial incentive meant money to those on Wall Street and around the world.  But it was a false incentive; and in the final accounting it was false profit as well.  The derivatives and tranching schemes designed to make these losing loans halfway profitable proved to be too fragile for the combo of plummeting house prices and the money market run that spawned the original TARP.  Like a house of spun straw, it simply blew away in the wind.

And the people who sold you that straw house? They are still in power.  And honestly, they will never pay for what they did.  I’ve made my peace with that.

So, who’s really responsible for the mortgage mess?  Well, really, it was everyone whose policies distorted the housing market.  (Although I’m not above saying that it was mostly Democrats.  I’m petty that way). Regardless of party, the truth is that this is what you get when the Feds run just about anything.  Particularly anything with an unfunded liability as a mandate.

Gosh, I can’t wait to see what they’ll do with my healthcare!

Regards,
R. Caine

March 18, 2009

Obvious Culprits and the Untold Stories of Fannie Mae was originally featured on Whiskey and Gunpowder

Remember the great hope for Hope Now…?

“Let’s not harp on about the costs, absurdities or risks of governments meddling in real-estate bubbles when they burst,” wrote BullionVault as the Bush administration pushed the initiative front-and-center in Dec. 2007.

“This is about hope. Hope now. Let’s worry about tomorrow some other time.”

Too bad tomorrow’s turned up, but with 917,000 homes foreclosed since then regardless. A further 1.3 million foreclosures are now in progress according to Hope Now’s own data, with nearly one-in-twenty of all US mortgages standing 60 days late or more on debt service.

Some 8.3 million mortgages risk being drowned by negative equity, too. So even if the lender moves to foreclose, the asset won’t cover the debt – if they can find a buyer at all – making the net loss of wealth truly systemic for America’s banks.

Which is kinda where all this began, only the other way round.

“Mortgage performance steadily declined each month in 2008,” says Hope Now in its full-year data. “One in 10 loans was delinquent in some way by December,” despite Hope Now itself helping modify and refinance almost a quarter-million loans that month. It helped modify and refinance a quarter-million loans yet again in January. By then, however, US real estate had lost $2.4 trillion of its value year-on-year, reckons First American CoreLogic.

Puff! It was gone, just like that. Which kinda makes you wonder where it all came from in the first place.

“There is broad agreement that until we begin to stem the tide of foreclosures, you will not get an end to the current crisis,” says Barney Frank, Democrat chair of the House Financial Services Committee, pointing to the, ummm, foreclosure crisis.

Put another way, “The remedy for [today's] deflationary delevering and mini-depression is simple and almost axiomatic,” as Bill Gross, head of the Californian bond giant, wrote last month:

“Stop the decline in asset prices.”

Such a happy truism; stop prices falling, and you’ll stop pricing falling. But how to achieve it? Maybe Gross doesn’t quite mean what he says. Not as simply as he says it, at least. Not without trimming his (occasional) moustache into a neat little paintbrush. You know, more like that highly-strung German chap who stole Charlie Chaplin’s look (minus the hat and cane) in the 1930s.

But that word “delevering” – it throws up the real problem sparked by declining asset prices: the gap between what they’re now worth, and how much money was borrowed to buy them.

“One in five US homeowners with mortgages owe more to their lenders than their properties are worth,” First American CoreLogic goes on, as quoted by Reuters, “and the rate will increase as housing values drop in states that have so far avoided the worst of the crisis.” That army of drowning, not waving debtors now threatens to swell by one-quarter if home prices slip only 5% further from here, as well.

Negative equity, of course, doesn’t in itself force default. It’s inability to pay, most often sparked by loss of income, which forces late payments. But negative equity makes the problem systemic. Because it gears up the net loss and spreads it from debtor to lender, levering the pain of foreclosure from the hurt of the home-loser to the net lending loss suffered by banks.

Lenders end up out of pocket – and so too might their lenders in turn – even if they can sell the house reclaimed to settle the mortgage. All of which, as we say, just replays the merry-go-round spiral of soaring house values and E-Z credit in reverse.

“Making Home Affordable will offer assistance to as many as 7 to 9 million homeowners,” said the Treasury on Wednesday. (Note the friendly, if all-too pessimistic, use of the singular “home”). Yes, the new commander-in-chief is leading a fresh charge against house-price deflation and the still-surging surge in foreclosures.

Once more, with feeling!

“The Home Affordable Refinance program will be available to 4 to 5 million homeowners [who] would be unable to refinance because their homes have lost value,” the Treasury went on, “pushing their current loan-to-value ratios above 80%…

“The Home Affordable Modification program will help up to 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments.”

Now throw on top the one million mortgagees expected to declare themselves bankrupt when Obama’s “cram down” bill wins the day in Senate (which it will), and up to 10 million American home-buyers look set to refinance or re-modify their loans, just 15 months after Dubya Bush and Hank Paulson swore blind that refinancing and re-modifying would stem the depression in housing.

Might it work this time round instead? Given that the cram-down act will enable federal judges to extend mortgage terms, slash the interest rates agreed with lenders, and cut the outstanding debt owed by insolvent homeowners, and you might expect the flood of foreclosures to slow. Destroying 1,000 years of contract law should achieve nothing less, you might hope. And that might stop home-prices tumbling. Right?

“Throughout 2008, the re-default rate ranged between 30% and 40%,” explains Hope Now, defining such recidivist shame as “any mortgage that is 90 or more days delinquent or in foreclosure 6 months after the date it was first modified.”

One-third of bad loans turned bad once again, in other words, even after the lender cut the debtor some slack. So perhaps the new hope for housing should just cut straight past the chase and go to the credits. Y’know, the bit where the state seizes outstanding home-loans entirely, and re-modifies their terms to give houses away free to what once were called “the buyers”.

Any house first bought for “no money down” should become a no money home, a free gift to the debtor. How’s that for putting a floor under prices!

“More householders than ever own their homes,” said the Census Bureau in 2001. Way up at 66.2%, however, that record ratio wasn’t high enough either for government or the finance industry. Hence the non-stop shilling by President Bush of home-ownership as a way to defeat racism, poverty, Bin Laden, you name it.

The number of owner-occupied homes had in fact swelled by nearly one-fifth in the previous 10 years. And since the 1990s marked prosperity (and even a shrinking fiscal deficit!) as interest rates ticked lower, runaway growth in home ownership was surely been an unalloyed good. Only an anti-American fanatic would think otherwise, you’ll agree.

But smothering fresh chunks of California, Nevada and Florida in hard-top failed to concrete over the basic facts of economics, however. Because where demand finds itself sated, but supply continues to build, over-capacity follows and prices start to fall back. And even before the housing recession became a depression, excess capacity was building fast in the US housing supply. The rate of occupation slipped from 87.5% to 86.4% between 2005 and 2007, while the total number of units crept higher to 128.2 million on the Census Bureau’s latest data.

Trying to stall or reverse this cold fact will clearly take more money – and more stupidity – than even the Bush administration could throw at the task. Such as, say, via fascism or hyper-inflation. Put a floor below prices, beneath which it’s illegal to sell; or allow house prices (if not the S&P too) to slide only in real inflation-adjusted terms, printing money to inflate the cost of living while nominal realty prices hold steady.

That would allow the slide in real asset values to continue, even as nominal prices stay flat or fall. Because short of socializing all houses and so taking their value to zero – a trick tried to sad effect across Eastern Europe c.1917 to 1991 – this tinkering and tweaking is just fighting a trend that cannot be stopped.

In this credit deflation, where the nominal price of all things is shrinking, that which inflated the most should now shrink the fastest. Both its share of total economic value and its absolute pricing are working to reverse their misallocation over the last decade and more.

And double the inflationary trouble means double deflation once the bubble has burst – as the financial services industry is only just finding out as well.

Regards,
Adrian Ash
BullionVault

March 9, 2009

Hope Now: Pretending People Can Keep Their Homes was originally featured on Whiskey and Gunpowder

The credit economy is dead and the dead credit residue of that dead economy is going where dead things go. It came into the world as “money” and it is going out of this world as a death-dealing disease, and we’re not going to get over this disease until we stop generating additional zombie money out of no productive activity whatsoever. The campaign to sustain the unsustainable is, besides war, the greatest pitfall this society can stumble into. It represents a squandering of our remaining scant resources and can only produce the kind of extreme political disappointment that wrecks nations and leads to major conflicts between them. I don’t know how much Mr. Obama buys into the current adopt-a-zombie program — his Treasury designee Timothy Geithner was apparently in on this weekend’s Citicorp deal — but the President would be wise to steer clear of whatever the walking dead in the Bush corner are still up to.

All the activities based on getting something-for-nothing are dead or dying now, in particular buying houses and cars on credit and so it should not be a surprise that the two major victims are the housing and car industries. Notice, by the way, that these are the two major ingredients of an economy based on building suburban sprawl. That’s over, too. We’re done building it and the stuff we’ve already built is destined to lose both money value and usefulness as the wrenching transition goes forward.

All this obviously begs the question: what kind of economy are we going to live in if the old one is toast? Well, it’s also pretty obvious that it will have to be based on activities productively aimed at keeping human beings alive in an ecology that has a future. Once you grasp this, you will see that there is no reason to despair and more than enough for all of us to do, so we can recover from the zombie nation disease and get on with the next chapter of American history — and I sure hope that Mr. Obama will get with the new program.

To be specific about this new economy, we’re going to have to make things again, and raise things out of the earth, locally, and trade these things for money of some kind that we earn through our own productive activities. Don’t make the mistake of thinking this is optional. The only other option is to go through a violent sociopolitical convulsion. We ought to know from prior examples in world history that this is not a desirable experience. So, to avoid that, we really have to put our shoulders to the wheel and get to work on things that matter, and do it at a scale that is consistent with what the world really has to offer right now, especially in terms of available energy.

In my view — and I know this is controversial — a much larger proportion of the U.S. population will have to be employed in growing the food we eat. There are many ways of arranging this, some more fair than others, and I hope the better angels of our nature steer us in the direction of fairness and justice. The prospects of a devalued dollar imply that we very shortly will not be able to get the all the oil-and-gas based “inputs” that have made petro-agriculture possible the past century. The consequences of this are so unthinkable that we have not been thinking about it. And, of course, the further implications of current land-use allocation, and the property ownership issues entailed, suggests formidable difficulties in re-arranging the farming sector. The sooner we face all this, the better.

Regards,
Jim Kunstler

November 26, 2008

Zombie Economics, Part I was originally featured on Whiskey and Gunpowder

“I say, I say, I say — Did you hear about the joke of a central banker…?”

Shock and awe was never supposed to be the Bank of England’s approach.

“Predictable,” even “stolid” were meant to be this ancient institution’s watchwords. The current chief, Mervyn King, proclaimed it so. Time and again.

“Our ambition at the Bank of England is to be boring,” declared Dr. King — a collegial buddy of Ben Bernanke’s at Massachusetts Institute of Technology (MIT) in the ‘80s — in a jolly speech of April 2000, just a few years after the Bank’s 300th anniversary.

But ever since the Bank gained “operational independence” from government diktat in May 1997, the only boring thing about monetary policy has been King’s after-dinner gags on the subject. The actual practice — and the resulting value of assets in Sterling — has been more like riding the Corkscrew at Alton Towers…and just about as sickening.

First the Dot.Com Bubble, then the housing market and finally energy, food, even Gold Bullion prices…everything lurched higher except the purchasing power of the Pound. The TechMARK index rose almost three-fold between Oct. 1999 and mid-March 2000. Then the Bank of England tried to baby-step away from its lowest rates in more than two decades…and the bubble collapsed.

Then the Bank tried to mop up the tech-stock collapse with cheap money, offered at the lowest rates in half-a-century. Consumers and lenders were only too eager to take it, and so average house prices almost tripled from ten years before. But raising rates — once again in little baby-step moves — to try and cool the resulting jump in inflation only popped that bubble in turn. And then, with the value of Sterling losing more than one-quarter against dollars and yen, even the gold price in Sterling shot higher…up from below £160 to break £550 an ounce this autumn as Dr. King and his team pumped limitless cash into London’s interbank markets to bail out those lenders drowning in unpayable debts.

Oh yes, the Old Lady (as the Bank’s still known after an 18th century cartoon) was only playing along with the rest of the world, of course. And she did have the City of London to consider as well — let alone British homebuyers and the real estate agents now packing the High Street. But boring she ain’t.

And now this old maid — thanks to a shock cut of 1.5% to the base rate on Thursday — is freer with her virtues than at any time since Dec. 1954.

Just whatever happened to boredom?

“We need to cut interest rates not to protect the banks, but to protect the public from the banks…”

So says David Blanchflower, the U.S. member of the Bank’s policy-making committee who’s voted to raise U.K. rates only once in 29 meetings since joining in June 2006.

He’s voted to cut rates on 14 separate occasions. And during his time on Mervyn King’s team, consumer-price inflation — which the Bank of England is mandated to target at 2.0% per year — has more than doubled to 5.2% annually.

But to return to his claim, Blanchflower says the bust-bubble in banking now requires cheap money to prop up consumers. If the rate runs too high — and banks in the U.K., as everywhere else, have signally failed to pass on the sharp cuts to rates ordered so far — home-loans will default, families will end up on the street, and people will simply stop spending.

And all because the U.K. economy can no longer bear interest rates of 5% per year — right around the long-run average of base rates ever since the Old Lady was put in charge of issuing money in 1844.

Now the British government wants private-bank lending to return to the 2007 level — a level that was twice the average of the previous ten years. And to kick-start the fun, the Bank of England has now slashed its base rate to the lowest level below inflation since 1978.

If you think this is a good way to protect innocent households from all those evil, grabbing bankers in the City — and if you think it’s a smart answer to the historic tower of debt now teetering above the U.K. economy — then you’re almost as funny as Mervyn King’s boredom.

Regards,
Adrian Ash

November 10, 2008

We may not live in England, but we don’t doubt for a moment that our own central bank isn’t busy destroying our currency too.

“Why aren’t gold prices exploding?” I get asked all the time. Your Whiskey editors are always going on about the eventual destruction of the dollar through printing and the resulting explosion in gold prices. So when’s it gonna happen?

Give it time, Whiskey Shooters. Things just don’t play out that linearly. The inflation of the money supply has to work its way into the system. The rot will creep in until its everywhere and suddenly things are just going to go haywire.

The BOE Cooks England’s Goose was originally featured on Whiskey and Gunpowder